DOE Backed Ethanol-to-Jet And SaaS Projects Will Build Future Value

Key Takeaways

• Transformative acquisitions and partnerships are expected to boost net margins and revenue through carbon monetization and lower production costs.
  
• Strategic projects and technology advancements aim to increase earnings by leveraging tax credits and expanding into new revenue streams.
  
• Gevo faces financial and logistical risks impacting revenue and margins, with reliance on market conditions, regulatory frameworks, and securing significant capital.

Catalysts

Operates as a carbon abatement company.

• The acquisition of Gevo North Dakota is seen as a transformative move, enabling monetization of carbon abatement and 45Z tax credits immediately, potentially generating $30 million to $60 million of adjusted EBITDA annually. This could positively impact revenue and earnings due to the low-carbon ethanol production at the site.
  
• The strong production growth in renewable natural gas (RNG), buoyed by the biogas 45Z tax credit and operational improvements, aims to add $9 million to $18 million in adjusted EBITDA by 2025. This could enhance net margins and overall earnings as the company monetizes the low-carbon fuel standard (LCFS) credits.
  
• The Alcohol-to-Jet 60 (ATJ60) project in South Dakota, supported by a conditional $1.63 billion loan from the DOE, could significantly enhance revenue streams once operational, with financial close targeted for 2025. The project further aims to capture carbon value in reporting and boost net margins through strategic off-take agreements.
  
• Gevo's partnership with Axens is expected to provide technological advantages and lower costs for ethanol-to-jet fuel production by about 30%. Lower CapEx and OpEx can enhance net margins and potential earnings as the technology scales up for commercial use.
  
• The expansion of Verity, Gevo's Software-as-a-Service (SaaS) business, reflects new revenue opportunities by facilitating tracking and transparency in regenerative agricultural products. This platform can tap into a large total addressable market, improving revenue and potentially net margins as it grows its customer base.

Gevo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gevo's revenue will grow by 126.1% annually over the next 3 years.
• Analysts are not forecasting that Gevo will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Gevo's profit margin will increase from -464.9% to the average US Oil and Gas industry of 14.7% in 3 years.
• If Gevo's profit margin were to converge on the industry average, you could expect earnings to reach $28.7 million (and earnings per share of $0.12) by about May 2028, up from $-78.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.3x on those 2028 earnings, up from -3.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Gevo Future Earnings Per Share Growth

Risks

• Gevo's projects are subject to risks and uncertainties, including delays in financing and construction which can significantly impact future revenue projections and earnings.
  
• The company will need to raise approximately $800 million for a special purpose vehicle to develop and operate their plant projects, introducing risks related to financial markets and investor interest which could affect margins and earnings if not successfully secured.
  
• Gevo's target of monetizing carbon abatement credits heavily relies on regulatory frameworks and the voluntary carbon market, presenting risks to their anticipated revenue and net margins if these markets do not develop as expected.
  
• The development of Gevo's ethanol-to-jet fuel projects hinges on overcoming logistical and regulatory challenges, such as pipeline infrastructure, which may lead to increased costs or reduced project returns, impacting net margins.
  
• Gevo's transition to positive adjusted EBITDA depends on a range of financial and market assumptions, where any misestimations or adverse market conditions could result in financial shortfalls affecting earnings.

Valuation

• The analysts have a consensus price target of $5.45 for Gevo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $1.15.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $195.4 million, earnings will come to $28.7 million, and it would be trading on a PE ratio of 55.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $1.13, the analyst price target of $5.45 is 79.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.